A Conversation with Larry Summers

Economist Larry Summers boasts a curriculum vitae rivaled by few. He has held senior advisory roles for Presidents Clinton and Obama and served as president of Harvard University. He recently spoke with BCG senior partner and managing director Xavier Mosquet about the U.S. government's bailout of the domestic auto industry in 2009, which Mr. Summers spearheaded under President Obama, and other topics. Edited excerpts from the discussion follow.

(conversation recorded June 3, 2013)

You’ve held many elite positions in government, academia, and the private sector. Looking back, is there a unique role or experience that you found particularly challenging and rewarding?

I’ve been very fortunate in that I’ve enjoyed and found enormously satisfying all of the jobs I’ve had a chance to do. But I suppose there were two moments that were particularly salient for me, both involving bailouts. I had the opportunity to be involved in a support program for Mexico during its financial crisis in 1994. I also had the opportunity to play a leadership role with respect to the U.S. auto-industry bailout in 2009.

Leading up to the auto bailout, how quickly did you determine that government intervention would be necessary?

There were a spectrum of options. There was an option of leaving the situation entirely alone. There was a very strong body of opinion that held that bankruptcy would be catastrophic for an automobile company, that bankruptcy was unthinkable, and that the government needed to act to prevent it. And there was the choice, which was ultimately followed, of putting the companies through bankruptcy but, in light of the extraordinary financial situation at that moment, having the government function as debtor-in-possession lender, because the appropriate level of financing would not otherwise be available in that timeframe and with the requisite quantity. It did not take long to conclude that the situation could not be entirely abandoned, that it was just too risky and costly to the economy to let the automobile industry go into liquidation.

Can you describe the nature of your early discussion with the industry leaders?

At that time, the management teams seemed almost in denial. They had given no thought to the possibility of bankruptcy but were not able to present a confident picture of how cash flows existed for another 60 days that would permit the companies to continue to operate. And so it was a very distressing and tense meeting. We certainly made it clear that while we didn’t know what path President Obama would choose or what path Congress would accept, we regarded the failure to contemplate bankruptcy as manifestly irresponsible.

What were some of the toughest moments of the whole process?

There were moments when it was not clear that there would be any viable strategy for Chrysler and that the prospect of liquidation had to be faced as a possibility. There were very difficult judgments in the case of General Motors about how much shrinkage would need to be part of the restructuring plan. There were issues with respect to the bankruptcy agreement as to how different categories of debt holders, and how different types of retirement benefits, were to be treated. There were also very difficult judgments as to how active, intrusive, and involved the government should be. On the one hand, in a market economy like ours, it’s not the business of the government to run automobile companies. On the other hand, as a major provider of finance in bankruptcy to what was, in essence, a failed company, the government would be irresponsible in not ensuring that its finance was well used. And so, questions of how active to be were very much at issue.

Are you happy with the results of the bailout?

I’m proud, and I think everyone who worked on that project should be proud, of the outcome. General Motors and Chrysler are both viable, functioning companies today. A great deal of unemployment, pension liability, burden on the economies of Michigan and the North Central part of our country, and burden on the federal fisc was avoided. The funds that the Obama administration put in will be fully recovered, though some of the early funds that were put in by the Bush administration now look unlikely to be recovered. So, all in all, I would judge that this was a substantial success.

More broadly, how would you characterize the“Summers doctrine” that helped stabilize the U.S. economy through the first years of the recession?

Markets overreact, therefore policy must overreact. One must act strongly and decisively in order to generate confidence, because confidence is the cheapest form of stimulus and growth. Supporting the middle class and its demand, which is the bedrock of any economy, [is critical)], as is avoiding financial panic and providing liquidity that prevents it, and doing it in a transparent way that promotes trust and doesn’t sugar-coat things. And doing it all as rapidly and decisively as possible, at the earliest possible moment, in a crisis. These are, I think, the doctrines that will serve us well if we have future crises.

It’s clear that the U.S. economy today is doing better on many measures. If you were back in the lead advisor role tomorrow, what are some of the things you would like to do?

I hope immigration reform will pass. Over time, that will make a very big difference to this country in terms of the economic energy it will bring in and the demographic support it will provide at a time when we face real burdens from entitlement programs.

Our infrastructure has lagged badly. Look at Kennedy Airport. Should the gateway to the greatest city in the greatest country in the world look as large parts of Kennedy Airport do? And if the answer is no, isn’t a moment when interest rates are 2 percent for 10 years, near 3 percent for 30 years, and almost zero in inflation-adjusted terms, and a time when construction unemployment rates are in double digits, the right moment to get to work on fixing it? And Kennedy is not an isolated example. There are examples of decaying infrastructure across the country. And they cost more to fix the more you delay fixing them. And [spending today] reduces future deficits, too, because we’re going to have to spend that money anyway. Why spend it later when we could spend it today and spend less of it? So I would put a very substantial emphasis on infrastructure investment.

And then, of course, there are other key areas of public investment. Education and scientific research stand out—we’re cutting back at a moment when the rest of the world is ramping up. We should be willing to ramp up as well.

Thanks for your time and insights, Larry.

My pleasure.